REPUTATION-BASED DISCLOSURE AND COST OF CAPITAL: THE ROLE OF CONTROLLING OWNERSHIP

Abstract

This study aims at examining the effect of reputation-based disclosure on the cost of capital and the role of the controlling ownership as a moderating variable. The sample of the study consists of manufacturing firms listed on the Indonesia Stock Exchange (IDX) for the years 2009–2013. This study uses price-earnings to growth (PEG) as a proxy of the cost of capital. The result demonstrates that reputation-based voluntary disclosure has a negative effect on the cost of capital. The controlling ownership further strengthened this effect. The cost of capital is reduced by higher disclosure. However, the interaction between reputation-based disclosure and ownership structure has a positive effect on the cost of capital. The result of this study is robust, using other measurements of the cost of capital (Fama-French model). It implies that investors can utilize firms’ disclosure as a signal to estimate returns. Firms, however, strive to impress investors positively to reduce the expected returns.